Chilean Equities: Near-Term Upside To Give Way To Longer-Term Uncertainty

We see room for additional upside for Chilean equities over the coming weeks and possibly even months, following a highly bullish break higher for the MSCI Chile equity index. The index broke through key technical resistance at 1,606 on March 16, a highly bullish technical signal, setting Chilean stocks up for a higher trading range. We see little technical resistance before the 1,870 level, which coincides with long-term trendline resistance on the monthly chart.

A Bullish Break

MSCI Chile Index (Daily)

Source: Bloomberg, BMI

However, the latest break implies potential additional upside of 13.0%. That said, we note that the MSCI Chile index is highly overbought on the daily chart, according to the relative strength index (RSI) momentum indicator. It will be key to see whether the index can sustain the latest break higher over the next several days.

Unlikely To Sustain Break Of Long Term Downtrend

MSCI Chile Index (Weekly)

Source: Bloomberg, BMI

The rally in the index has reflected investor optimism that strengthening commodity prices, especially copper, will support stronger growth in Chile in the coming quarters. The rise in global commodity prices has been part of the 'reflation trade' following the US presidential election, which has also driven weakness in the US dollar, both offering support to the MSCI Chile index ( see 'Regional Equities To Benefit From Reflation Trade', January 30). After bottoming in early 2016, the broad recovery in commodity prices pushed the index higher, accelerating in the latter months of the year. The price of copper, Chile's main export, has risen 34.3% from its January 2016 low, contributing to a significant improvement in the country's terms of trade.

Equities Broadly Tracking Terms Of Trade Higher

MSCI Chile Index & Chile Terms of Trade

Source: Bloomberg, Citigroup, BMI

Chilean firms, which typically have large footprints across Latin America, have also benefited from more positive growth outlooks across the region ( see 'Commodity Prices, Investment Flows To Spur Latin America's Recovery', January 10). Expectations of higher commodity prices and stronger regional growth have led to robust performance across sectors in Chilean stocks.

Strong Performance Across The Board

MSCI Chile Sub-Indices, March 22 2016 = 100

Source: Bloomberg, BMI

Additionally, favourable valuations support short-term outperformance by Chilean equities over other Latin American equity markets. Despite the significant rally in share prices in recent weeks, valuations in Chile remain in line with those of emerging markets, and comfortably below valuations seen in Latin America's other markets. On March 22, MSCI Chile's price-to-sales ratio came in at 1.35, compared to 1.47 for the MSCI Latin America equity index.

However, we expect that the recovery in Chilean stocks will likely lose momentum over the coming months. Our forecasts for copper to average USD5,500/tonne and oil to average USD57.0/bbl in 2017, from year-to-date averages of USD5,770/tonne and USD55.1/bbl, respectively, suggest limited upside to Chile's terms of trade moving forward.

Additionally, economic growth will be subdued compared to historical averages, as a result of weaker performance in the extractive sector and tepid investment. We forecast real GDP growth to average 2.8% y-o-y over the next five years, compared to 4.0% between 2000 and 2016 ( see 'Wildfires & Mining Strikes Will Moderate Growth', February 28). This places Chile on the lower end of performers among emerging markets over the coming years ( see 'Three-Speed Emerging Markets', March 2).